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There
is really just one question about China, the Western mindset’s
“enigma wrapped in mystery”. How could the Chinese have made the
colossal mistake of investing their hard-earned savings in the debt of the
U.S. government — to the tune of $ 1 trillion, the largest sum one
country has ever loaned another in all history. (There is only one other
puzzle greater than this: How could the U.S. government in good faith
allow its debt to accumulate in Chinese hands? But we leave that question for
another occasion to discuss.) U.S. debt is easy to buy but hard to get rid
of. The harder, the larger are the sums involved.
It
is true that a huge bull market in bonds has been rolling on for the past 30
years — since 1981. But putting all of China’s eggs into the same
basket was a terrible mistake even if we ignore the reckless fiscal and
monetary policy the U.S. government has been pursuing since 1971. Belatedly,
the Chinese are trying to correct their mistakes through diversification.
China
could have learned from Japan’s sad example. Before the Chinese
appeared as buyers, Japan was the largest investor in U.S. debt. In 1971
Japan was running an unprecedented trade surplus vis-à-vis the
U.S., and the exchange rate of the Japanese yen was 300 to the dollar.
American policymakers and money doctors put enormous pressure on Japan to let
the yen float upwards, as this was the “in-thing” to do after the
Nixon-Friedman conspiracy made the U.S. default on its foreign gold obligations
“respectable”, on the spurious theory that this would first ease,
then eliminate the American trade deficit.
Japan,
in effect still an occupied country, yielded to the American pressure and the
yen rose so that by 1981 only 100 yens were needed to buy one dollar. This
was a 3-fold appreciation of the yen, but it did not bring about an
improvement in the American trade deficit with Japan, as promised by Friedmanite propagandists. Instead, there was a
10-fold further deterioration! Yet the Americans did not revise their
policy recommendations, and continued to insist on floating the yen upwards.
It appeared that the Americans had a hidden agenda that was not the
elimination of the American trade deficit. Could it have been abatement of
the American debt? Indeed, the yen-value of Japan’s foreign exchange
reserves held in dollars was cut by two-thirds as a result of foreign
exchange policy forced upon Japan.
The
Chinese should have seen the writing on the wall: buying dollar-denominated
assets was tantamount to kissing good-by to your savings. In terms of the
Nixon-Friedman conspiracy this was extortion, an underhanded way of secretly
siphoning off the savings of America’s trading partners running
surpluses, disguised as exchange-rate policy.
Worse
still, when the Japanese wanted to draw on the remnants of their savings held
in American banks to tie them over temporary cash shortages, they found that
the money wasn’t there. The American money-doctors were ever-ready to
come up with a solution. The Japanese government had excellent credit rating
and no debt to foreigners. Why not borrow the money it needed? Once more, the
Japanese meekly complied. They swapped their temporary need for
dollars for permanent government debt in yens. By now the Japanese
government has the worst indebtedness on record: it would take 2 years of
Japan’s GDP to pay it off. See the vicious combination: selling
bonds in an appreciating currency while buying bonds in a depreciating
currency? A free one-way ticket to the poorhouse.
China
should have seen the trap. The Americans want them to buy all the
dollar-denominated bonds. Then they would start twisting arms to let the yuan float upwards, ostensibly as a valid exchange-rate
mechanism to rectify trade imbalances. Clearly, it is not a valid mechanism
because, well, it does not work. It only makes the trade imbalance worse.
Neither are the Americans shooting for elimination
of their trade deficit. They are shooting for an abatement of America’s
debt. They know that higher exchange rate for the yuan
means imperceptibly siphoning off China’s savings. An indigent country,
China, underwrote with its savings the profligacy of an affluent country, the
U.S. Unbelievably, China appears to be caving in to American demands and let
the yuan float upwards.
If
the Chinese wanted to draw on the remnants of their savings held in American
banks, they might just find out, as the Japanese did before them, that the
money isn’t there.
It
can be safely predicted that the American debt-mongers would again be on hand
to come up with the solution. China has excellent credit rating and zero debt
to foreigners. The Chinese should borrow the dollars they needed, to tie themselves over, rather than liquidate their dollar
holdings. Like Japan earlier, China, too, could swap its temporary
dollar shortage for permanent government debt in the domestic
currency. This is debauchery: Mephistopheles trying to corrupt the
uncorrupted. This is lacing foreign banking systems with toxic debt.
The
Chinese puzzle can be stated as follows. The irrational and masochistic
behavior of the Japanese can be explained by the fact that Japan is still an
occupied country. But China is not. China could refuse to listen to the
siren-song of the American exchange-rate manipulators and debt-mongers. Why
doesn’t China stand up to this corruption? “Just say no” to
the drug of indebtedness, and expose the debauchery behind it!
Here
is the explanation of the Chinese puzzle from a non-Chinese perspective. The
1972 popping up of Nixon in China (which was worth composing an opera on the
theme) started the pilgrimage of young uncorrupted Chinese scholars to
American universities. Well, at least those among them who were economists,
monetary scientists, and banking experts have been thoroughly corrupted and
brainwashed. Keynesian and Friedmanite theories
have been pumped into them through force-feeding. They have never been told
that there is a coherent and respectable body of economic knowledge refuting,
point-by-point, the false and corrosive economic theories of Keynes and
Friedman. China utterly lacks scholars who are well-versed in Austrian
economics and in valid monetary theory, to provide antidote for the Keynesian
and Friedmanite poison. China was made a fertile
ground for American debauchery.
Friedman’s
theory of deliberate use of foreign exchange rates as a tool of balancing
foreign trade is vicious, false, and fraudulent. It has never worked. It
never will. It is motivated by American self-interest, ready to wage a new
opium war on China, to reduce the indebtedness of the U.S. through a
disguised devaluation of the dollar, at the expense of its trading partners,
and to push the responsibility for the trade imbalance on the surplus
countries.
The
correct solution to the trade problem is not the flotation of currencies up
and down. Quite to the contrary: the solution is the stabilization of
foreign exchange rates! China badly needs advisors who are able to
show the way in this direction.
ANNOUNCEMENT
New Austrian School of
Economics
Course Two at the Martineum Academy in
Szombathely, Hungary,
from March 5 through 13, 2011. Title of the course:
ADAM SMITH’S REAL
BILLS DOCTRINE AND SOCIAL CIRCULATING CAPITAL
What makes this course especially topical today is
the fact that more and more hints are being dropped about the possible
rehabilitation and restoration of the gold standard — following the
ignominious collapse of the irredeemable dollar. However, a gold standard
without its clearing house, the bill market, is not viable and itself is liable to collapse in short order
— as it did in the early 1930’s. The level of public ignorance
about the necessity of a clearing house is appalling. It is made that much
worse by a tottering banking system. We have an urgent message: only gold
standard cum real bills can restore prosperity to the world, in view
of the fact that we have to write off the world’s banking system as
a total loss.
This
is the second in a four-course series on Austrian Economics, a branch of
economic science based on the work of Carl Menger
(1840-1921). It is meant for those, including beginners, who are interested
in the theory of money, credit, and banking, with special emphasis on the
current financial and economic crisis. The complete program consists of
four courses (10 days, 20 lectures each). Completion of each course will earn
one credit. Participants who have accumulated four credits get a diploma
signed by Professor Fekete. Course One that was
given in 2010 is not a prerequisite. It is available on DVD for
purchase.
NEW: there will be an add-on optional
one-day seminar on the gold and silver basis and the threat of permanent
backwardation of the monetary metals on March 14. Stay tuned for
further details. NOTE: All scholarships have now been awarded.
For
further information please contact Dr. Judith Szepesvari,
e-mail: szepesvari17@gmail.com
NEW! EXTRA!
SEMINAR
Basis, Co-basis, Permanent Backwardation of Gold and
Silver and What It Means
March 14, Monday
The New Austrian School of Economics is the only place in the world where you
can learn about the gold and silver basis, co-basis,
permanent backwardation, and their importance. In 2008 we offered a
successful Seminar on the basis in Canberra, Australia, that was followed by
a second Seminar in 2009. This will be the third in the series, where the
latest results of the ongoing research on the gold and silver basis and
co-basis will be discussed by our star research fellow, Sandeep
Jaitly, followed by an open-ended discussion.
No
prerequisites are needed: we start with an introductory lecture on the basis
and co-basis, with reference to permanent backwardation, by Professor Fekete.
For
more details, contact Dr. Judit Szepesvari:
szepesvari17@gmail.com
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